Assignment -2

Q2. Reliable Auto Parts has 5,000 shares of common stock outstanding. The company also has
the following amounts in revenue and expense accounts.
Sales revenue $ 85,000
General and administrative expense excluding depreciation 7,500
Selling expense 4,000
Interest expense 3,500
Depreciation expense 5,000
Preferred stock dividends 500
Cost of goods sold 50,000
Tax rate 40%
Construct an income statement in good form and answer the following:
(a) Gross profits. (b) EBIT.
(c) Net profits after taxes (d) Earnings per share.
(e) Dividend per share if 60% of the earnings are distributed as dividend.

Solution:

Sales revenue $ 85,000

Less: Cost of goods sold 50,000
Gross Profit 35,000
Less: Operating Expenses 16,500
EBIT/NOI 18,500
Less: Interest 3,500
EBT 15,000
Less Tax (15,000X40%) 6,000
Net Income after Tax 9,000

Operating Expenses =
General and administrative expense excluding Depreciation 7,500
Selling expense 4,000
Depreciation 5,000
16,500

Earnings per Share = (Net income – Preferred Dividend)/ No. of Share outstanding
= (9000- 500)/5000
= 1.70

Earnings per Share = 1.70 X 0.6 = 1.02

Q3. Predator Pucks, Inc., has current assets of $4,000, net fixed assets of $22,500,
current liabilities of $3,400, and long-term debt of $6,800. What is the value of the
shareholders’ equity account for this firm? How much is net working capital?
Solution:
To find owner’s equity, we must construct a balance sheet as follows:
Balance Sheet
CL $3,400
CA $4,000 LTD 6,800
NFA 22,500 OE ??

TA $26,500 TL & OE $26,500

We know that total liabilities and owner’s equity (TL & OE) must equal total assets of
$26,500.
We also know that TL & OE is equal to current liabilities plus long-term debt plus
owner’s
equity, so owner’s equity is:
OE = $26,500 – 6,800 – 3,400 = $16,300
NWC = CA – CL = $4,000 – 3,400 = $600

Q4. Mama Roach Exterminators, Inc., has sales of $634,000, costs of $305,000,
depreciation expense of $46,000, interest expense of $29,000, and a tax rate of 35
percent. What is the net income for this firm? Suppose the firm paid out
$86,000 in cash dividends. What is the addition to retained earnings?
Suppose the firm had 30,000 shares of common stock outstanding. What is the
earnings per share, or EPS, figure? What is the dividends per share figure?
Solution:
The income statement for the company is:
Income Statement
Sales $634,000
Costs 305,000
Depreciation 46,000
EBIT $283,000
Interest 29,000
EBT $254,000
Taxes(35%) 88,900
Net income $165,100
One equation for net income is:
Net income = Dividends + Addition to retained earnings
Rearranging, we get:
Addition to retained earnings = Net income – Dividends = $165,100 – 86,000
= $79,100
EPS = Net income / Shares = $165,100 / 30,000 = $5.50 per share.
DPS = Dividends / Shares = $86,000 / 30,000= $2.87 per share

Q5. Given the following information for Mama Mia Pizza Co., calculate the depreciation
expense:
Sales $34,000; costs $16,000; addition to retained earnings $4,300; dividends paid
$1,200; interest expense $2,300; tax rate 35 percent.
Solution:
The solution to this question works the income statement backwards. Starting at the
bottom:
Net income = Dividends + Addition to ret. earnings = $1,200 + 4,300 = $5,500
Now, looking at the income statement:

EBT – EBT × Tax rate = Net income

Recognize that EBT × tax rate is simply the calculation for taxes. Solving this for EBT
yields:

EBT = NI / (1– tax rate) = $5,500 / (1 – 0.35) = $8,462

Now you can calculate:

EBIT = EBT + Interest = $8,462 + 2,300 = $10,762

The last step is to use:

EBIT = Sales – Costs – Depreciation
EBIT = $34,000 – 16,000 – Depreciation = $10,762
Solving for depreciation, we find that depreciation = $7,238
Q6. Based only on the following information for Angkaw Corp., did cash go up or down?
By how much? Classify each event as a source or use of cash.
Decrease in inventory $400
Decrease in accounts payable 160
Increase in notes payable 580
Decrease in accounts receivable 210

Decrease in inventory - source of cash $400

Decrease in accounts payable - use of cash 160

Increase in notes payable - source of cash 580

Decrease in accounts receivable - source of cash 210

Changes in cash = sources – uses = $400 + 580 + 210 – 160 = $1,030.

Cash increased by $1,030

Q7. For the year just ended, Ratterman Frozen Yogurt shows an increase in its net fixed
assets account of $625. The company took $170 in depreciation expense for the year.
How much did the company spend on new fixed assets? Is this a source or use of cash?

New investment in fixed assets is found by:

Net investment in FA = (NFAend – NFAbeg) + Depreciation

Net investment in FA = $625 + 170 = $795

Q8.
Solution:

Source(+)
2009 2008 or Use(-)?
Cash $ 400 $ 500 +
Accounts receivable 250 300 +
Inventory 450 400 –
Current assets 1,100 1,200
Net property & equipment 1,000 950 – *

Total assets $2,100 $2,150

Accounts payable $ 200 $ 400 –

Accruals 300 250 +
Notes payable 400 200 +
Current liabilities 900 850
Long-term debt 800 900 –
Total liabilities 1,700 1,750
Common stock 250 300 –
Retained earnings 150 100 +
Total equity 400 400
Total liabilities and equity $2,100 $2,150

The book value of property and equipment is stated net of depreciation. Because the book value
*

of fixed assets increased, and depreciation is an adjustment that reduces the account balance,
Batelan must have purchased addition fixed assets. But, without more information we cannot
determine the amount of the purchase.

The retained earning balance increased in 2009, so Batelan must have generated a positive net
income. But, without additional information (i.e. the amount of net income), we cannot tell
whether dividends were paid in 2009.
Q9. Some recent financial statements for Smolira Golf Corp. follow.

Prepare the 2007 statement of cash flows for Smolira Golf Corp.
Fixed Asset acquition = Net change in Plant and Equipments + Depreciation expense for 2007

= $16,409 + $21,950 = $38,359.

Q10. Refreshing Pool Corporation reported net operating income equal to $120,000 this year.
Examination of the company’s balance sheet and income statement shows that the tax rate was
40 percent, the depreciation expense was $25,000, $150,000 was invested in assets during the
year, and invested capital equals $500,000. The firm’s average after-tax cost of funds is 12
percent. What was the firm’s (1) operating cash flow, (2) free cash flow, and (3) economic
value added (EVA)?

Solution

(1) Operating cash flow = NOI (1 – Tax rate) + Depreciation

= 120,000(1-.40)+25,000
=72,000+25,000 = 97,000.
(2) Free cash flow = Operating cash flow – Investment
= 97,000 – 150,000
= - 53,000

Q11. Last year Z&B Paints reported its net income as $650,000. A review of its income
statement shows that Z&B’s operating expenses (fixed and variable), excluding depreciation
and amortization, were $1,500,000; its depreciation and amortization expense was $300,000;
and its tax rate was 35 percent. Z&B has no debt—that is, the firm is financed with stock only.

a. What were Z&B’s sales revenues last year?

b. What was Z&B’s operating cash flow last year?

Solution:
a. NI = (Sales – Operating costs – Interest expense)(1-T)
$650,000 = (Sales - $1,500,000 - $300,000 – 0)(1 – 0.35)

$650,000
Sales   ($1,500,000  $300,000)  $2,800,000
0.65

b. Operating cash flow = $650,000 + $300,000 = $950,000

Q12. Psyre Company reported net operating income (NOI) equal to $150,000 this year.
Examination of the company’s balance sheet and income statement shows that the tax rate was
40 percent, the depreciation expense was $40,000, $120,000 was invested in assets during the
year, and invested capital currently is $1,100,000. If Psyre’s average after-tax cost of funds is
10 percent, what is the firm’s EVA?

Solution:
EVA = $150,000(1 – 0.4) – 0.10($1,100,000) = -$20,000